October 19, 2014

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October 17, 2014

Second Circuit Clarifies E-Commerce Contract Formation Requirements

A common concern with online terms of use and other electronic contracts is that, on their face, they do not meet all of the required elements necessary for the formation of an enforceable contract. It can be difficult to determine whether a single contract or a series of smaller contracts was formed. Questions surrounding offers, acceptance and counteroffers may complicate the analysis. These difficulties can bring into question whether there was a meeting of the minds between a company and its customer, and may open the door to questions regarding the timing of contract formation and its effect on the terms later provided.

Shrink-wrap v. Click-wrap v. Browse-wrap Contracts

Shrink-wrap contracts entered widespread use in the 1980s and 1990s. Many of the leading cases regarding contracts that contain additional terms after the purchase of the products were developed in connection with software purchases. Due to spatial limitations, the only way to include all of the terms of a contract was to separate some of the terms and enclose them within the packaging. Even though required elements of contract formation were missing such as notice of the terms, and mutual assent thereto, courts slowly came to accept shrink-wrap contracts provided that the customer was able to return the product within a reasonable period of time. In ProCD v. Zeidenberg,1 the Seventh Circuit held that Zeidenberg was bound by the terms and conditions of a software license included in a users’ manual within the packaging, and which was displayed on a computer screen upon installation and use of the software. The Seventh Circuit held that “[Shrink-wrap] licenses are enforceable unless their terms are objectionable on grounds applicable to contracts in general.”2

Browse-wrap contracts display the terms and conditions of a contract somewhere on a webpage but do not require the customer to acknowledge the terms. Proponents of browse-wrap contracts have argued that they are logically indistinguishable from shrink-wrap contracts insofar as additional terms are available to the customer, even if there is no actual notice and assent. However, the seminal case regarding the enforceability of such contracts in e-commerce is Specht v. Netscape Communications.3  In Specht, the Second Circuit held that downloading free software from Netscape’s website without manifesting assent to the software license terms located at the bottom of the webpage did not form an enforceable contract.4 The Court identified two central issues in Specht: (i) a lack of notice of the contractual terms, and (ii) unambiguous manifestation of assent.5 This latter point has given rise to the distinction between browse-wrap contracts and click-wrap contracts. Browse-wrap contracts are generally held to be unenforceable because there is no manifestation of assent. Click-wrap contracts require customers to click an “I Agree” button on the website that memorializes their agreement to the terms. Click-wrap contracts are typically held to be enforceable, however a court’s analysis of these types of cases depends heavily on the specific facts of each case.

Clarity Offered from the Schnabel Case

The Second Circuit added additional clarity regarding the requirements of notice and assent in the context of e-commerce contracts with its decision in Schnabel v. Trilegiant.6 In Schnabel, the plaintiffs-appellees had purchased items online from websites and after they completed their purchases, the customers clicked on a link to receive “cash back” on the purchase.7 The advertisement for “cash back” was offered by “Great Fun,” one of Trilegiant’s subsidiaries, and for a monthly fee of between $9 and $40, the customer would enjoy access to a discount club.8 Additional terms of the contract were included in an email from Great Fun to the plaintiffs that followed after formation of the contract. The only way for a customer to cancel the automatic payment was to call a toll-free number.9 The court held that a mandatory arbitration provision, contained in the email sent after customers had enrolled in the discount program, was unenforceable due to the lack of notice and the absence of any manifestation of assent.10

Companies Must Clearly Provide Notice of Additional Terms

The Schnabel decision follows earlier precedent insofar as a vendor must provide clear notice of the terms of a contract.11 The court identified two types of notice that are sufficient to meet this burden, actual notice and inquiry notice. The Second Circuit analyzed Schnabel with respect to whether or not there was sufficient inquiry notice surrounding the initial contract such that a reasonable person would become aware of additional terms of the contract.12 It identified a list of three nonexclusive factors to evaluate inquiry notice: (1) the conspicuousness of the terms, (2) the course of dealing between the company and the customer, and (3) industry practices.13

While the court did not delve into a deep analysis of the course of dealings between the company and the customer or common industry practices, it is reasonable to assume that the court found the separation of the arbitration provision unnecessary from the initial terms of the contract, and that Great Fun attempted to obscure the additional terms.14 This determination strongly colored the rest of the court’s analysis, specifically its determination that an unsolicited email from a company with additional contractual provisions, without more, is insufficient to alert a customer that the contents of any such email relate to additional terms in a contract.15

The court also stated that the customer did not need to agree on the terms of the arbitration provision prior to the use of the services from Great Fun. The court noted that the terms of the contract were both “temporally and spatially decoupled” from plaintiffs’ enrollment and use of the services.16 The court concluded its analysis and applied a reasonable person standard to the Company’s actions. The court was not persuaded that an unsolicited email with additional contractual terms, without reference to the additional terms in the initial exchange between the company and the customer, survived the inquiry notice evaluation. The court stated, “[T]rilegiant effectively obscured the details of the terms and conditions [of the contract] and the passive manner in which they could be accepted.”17 The court held that the plaintiffs were not on inquiry notice based upon a nondescript email communication and the confusing subtlety in which the contract between Trilegiant and Schnabel was established.

Parties Must Clearly Assent to Additional Terms

The Schnabel decision also provided insight regarding the actions a court will consider to find manifestation of assent. The court evaluated the actions of both the company and the customer to determine whether “reasonable people in the parties’ positions would understand [the actions] to be assent.”18 Here the court loosely applied an equitable standard to its evaluation. It held that the absence of actively calling a toll-free number to cancel the automatic payment from the plaintiffs’ credit cards was too passive to find the plaintiffs manifested an understanding of the terms and subsequently accepted.

Best Practices for Wrap Contacts

In light of Schnabel, it should be clear that companies should not rely on browse-wrap contracts or contractual terms sent via unsolicited email, as these are unlikely to be binding. Companies must require three things in order to establish an enforceable wrap contract. First, they must conspicuously notify the consumer that he or she is bound by additional contractual terms that will be presented at a later time. Second, companies should conspicuously present the later terms. Finally, companies should require active assent to the later terms.

Companies must clearly disclose the additional terms to any contract, as well as the fact that the customer should expect additional terms as part of the initial contract formation event. Courts will apply a reasonable person analysis to both the terms of the contract as well as the method used to notify the customer of the additional terms. Companies should avoid reliance on course of dealings and industry practices to establish inquiry notice to the extent possible.

Finally, companies with e-commerce business should always acquire active assent to contractual terms provided to a customer. Courts do not look kindly upon a situation where assent is easy to obtain, and a company nonetheless fails to obtain it.19 This is as simple as including an “I Accept” button or requiring a response to an email distribution. Passive assent of contractual terms is always inferior to active assent. Such an assent demonstrates both notice and assent, thereby establishing the basic elements of contract formation.


1. ProCD v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996).

2. Id. at 1448.

3. Specht v. Netscape Communications Corp., 306 F.3d 17 (2d Cir. 2002).

4. Id.

5. Id. at 35.

6. Schnabel v. Trilegiant Corp., No. 11-1311-CV, 2012 WL 3871366 (2d Cir., Sept. 7, 2012).

7. Id. at *2.

8. Id.

9. Id. at *3.

10. Supra note 1.

11. Specht, 306 F.3d at 29.

12. Schnabel, 2012 WL 3871366 at *12.

13. Id. at *11.

14. Id. at *14.

15. Id. at *13.

16. Id.

17. Id. at *14.

18. Id. at *15.

19. Campbell v. Gen. Dynamics Gov't Sys., 407 F.3d 546, 556–57 (1st Cir. 2005).

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About this Author

Thomas G. Woolsey, Corporate Securities Attorney, Andrews Kurth, law firm
Associate

Tom's practice is focused on corporate and securities transactions, mergers and acquisitions and general corporate governance.

Representative Experience

The following represents experience prior to joining Andrews Kurth:

  • Assisted in the representation of an E&P company in connection with the formation of two oil and gas joint ventures with a large international private equity fund in a transaction valued at an aggregate of $740 million.
  • Assisted in the representation of a publicly-traded Beijing-...
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